Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ChemoMetec A/S (CPH:CHEMM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ChemoMetec

What Is ChemoMetec's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 ChemoMetec had ø18.0m of debt, an increase on ø19.2, over one year. However, it does have ø98.2m in cash offsetting this, leading to net cash of ø80.2m.

How Healthy Is ChemoMetec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ChemoMetec had liabilities of ø55.0m due within 12 months and liabilities of ø9.89m due beyond that. Offsetting this, it had ø98.2m in cash and ø37.1m in receivables that were due within 12 months. So it actually has ø70.4m more liquid assets than total liabilities.

This surplus suggests that ChemoMetec has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ChemoMetec has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that ChemoMetec grew its EBIT by 123% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ChemoMetec will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.